Goldman Sachs Preview: WAM Extension In A Close Call

Goldman expects the Fed this week to introduce outcome-based fwd guidance for asset purchases and to "moderately extend" the weighted avg maturity (WAM) of Tsy purchases – though they say this is a close call.

• The language around asset purchase guidance will be softer than on rates liftoff (using 'on track' to meet dual mandate goals before taper). Goldman: "To avoid having to tighten too rapidly later, we expect the FOMC will aim to begin tapering asset purchases about 1-1.5 years before liftoff so that it can taper at a gradual pace and leave a buffer between the end of asset purchases and the first rate hike"
• This would be more dovish than consensus, per Goldman, as expectations are for "an earlier tapering that begins further ahead of liftoff."
• Re WAM extension, the key arguments are 1) to shift from supporting market function to providing accommodation, and makes sense on a per-dollar-of-purchases to buy longer maturities, and 2) COVID presents downside risks to the winter outlook, and FOMC may see this as the "obvious moment to shoot their last bullet".
• As for a Bank of Canada style move to reduce quantity/extend maturity, the Fed "seems unlikely to attempt it ... without having sufficiently presented the idea to financial markets in advance".